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The widely publicized family feuds surrounding the estates of Tom Petty, Aretha Franklin, Prince and other celebrities vividly illustrate why estate planning is essential to provide for the people and things you care about most, even if you’re not a rock star.
While celebrity cases may make headlines, the angst, divisiveness, costs and public exposure (albeit to lesser degree) are played out daily in probate courts across the country. Assets are tied up, family members are at odds, tax and legal bills mount and private information becomes public.
Estate planning is not just for the wealthy
In the past, many people considered estate planning as something just for the wealthy. That view is changing, yet many Americans have not taken the most basic steps to ensure that their heirs are properly provided for in the future. In fact, a recent survey by Edward Jones found that while 77% of Americans believe that estate and legacy strategies are important for everyone, only 24% of Americans have even taken the time to designate beneficiaries for all of their accounts, leaving the simplest of legacy decisions up in the air.
It is encouraging that most people recognize how a properly planned estate or legacy strategy puts you in control of what happens to what matters most to you, such as minor children, dependents, financial assets, charitable contributions and even your own health care decisions. However, it is startling that despite this awareness, most Americans still do not have a plan. Without a plan, your assets could be subject to the time-consuming, expensive and very public probate process, where relatives and creditors can gain access to your records and even challenge your will.
The data also show a lack of urgency in engaging in legacy conversations. For example, nearly two-thirds (64%) of Americans who said they have worked with financial advisers reported never having discussed estate goals and legacy plans with their financial adviser. Furthermore, only 34% of millennials and members of generation X have discussed their estate/legacy goals with their financial advisers. Baby boomers, the generation most likely to need estate plans in the near future, were not much further ahead at 38%.
What’s at risk?
The short is answer is just about everything you’ve intended for your beneficiaries. At the very least, without a plan, your estate can be hit with a 40% federal tax, plus state estate taxes, where applicable. If probate turns into a legal battle among family members, legal fees can eat up another good portion of the estate. Further, sorting out your estate through probate could take years, delaying benefits to those you care about most.
Beyond the financial issues, there is the human element. Probate fights often inflict permanent damage on families and leave people divided for a lifetime. There is a reason that estate planning and legacy planning are often used interchangeably. Part of your legacy should be keeping the family together for generations to come. Estate planning is no guarantee that someone might feel slighted, but it’s a good — and essential — start to pave the way for the future.
Ways to approach estate planning
One of the best ways to approach estate planning is to start by thinking about what’s important to you and answering these questions.
What will happen to my children? While you will most likely be alive when your children reach the age of majority (either 18 or 21, depending on where you live), you should not leave it to chance. As part of your estate planning, you may want to name a guardian to take care of minor children, if it becomes necessary. You may also consider naming a conservator to manage any assets your minor children might inherit.
Will there be a fight over my assets? Without a sound estate plan, your assets could be subject to the time-consuming, expensive — and very public — probate process. But with proper planning, you can maintain your family’s privacy and assure your assets are distributed according to your wishes. As one possible element of an estate plan, you may consider a living trust, which allows your assets to avoid probate and pass quickly to the beneficiaries you’ve named.
Who will oversee my finances and my living situation if I become incapacitated? You can build various forms of protection into your estate plan, such as a durable power of attorney. This generally allows you to designate someone to manage your financial affairs if you become physically or mentally incapacitated. You can also create a medical power of attorney, which generally allows someone to make health care decisions on your behalf if you are unable to make them yourself.
Will I shortchange my family if I leave significant assets to charities? Unless you have unlimited resources, you may have to make some careful choices about charitable giving and providing for your family. There are at least two ways to navigate this delicate balance. The first is a charitable lead trust often used to support charitable giving for a period of time, with the remaining assets eventually going to family members. The second is a charitable remainder trust. This approach can provide a stream of income for your family members for the term of the trust, with the remaining assets eventually transferred to one or more charitable organizations.
How to protect your assets and your family
No financial plan is complete without a legacy strategy. A key purpose of planning your estate is so that loved ones and your assets are cared for according to your wishes, while also maintaining your privacy. Developing a plan may seem daunting at first, but there are four relatively easy steps that individuals can — and should — take sooner rather than later to make sure their financial house in order for now and for the future, including:
Designating beneficiaries. First and foremost, you should designate beneficiaries on each of your appropriate financial accounts. This is simplest and quickest way to get started and can be done without the need for legal advice and at no expense.
Seeking tax, legal and financial advice. To establish a sound estate plan, individuals should consult with tax, legal and financial advisers to ensure that their plans are tax efficient, actionable within their legal jurisdictions and provide for all heirs according to their wishes. Yet, nearly two-thirds of those surveyed who work with a financial adviser reported that they have never discussed estate planning with their adviser. Since working with a financial adviser is a logical first step, it is doubtful that these respondents have sought tax or legal advice either.
Creating an estate plan and reviewing it regularly. As beneficiaries, survey respondents indicated the three most important things their parents did or can do for them before they pass include having a will/legacy strategy in place (39%), paying off their outstanding debt (18%) and telling them where their money and assets are held (11%). Of course, things can change over time, so any plan should be reviewed periodically to ensure that it continues to meet your wishes.
Communicating your wishes to your family. Communicating with your beneficiaries is key to developing a sound plan and ensuring that your estate goes to those you care about most, while reducing the likelihood of a family feud. Most Americans (73%) are confident that their beneficiaries will know how to carry out their estate or legacy plan or use their inheritance when the benefactor is gone. However, only 49% of beneficiaries are confident they know how to carry out the estate plan of a loved one. Clearly, there is room for more communication here.
These steps can go a long way toward avoiding the common pitfalls that individuals without a legacy plan face. Even if a will or an estate plan is challenged by disgruntled heirs, it’s better to have a plan, than no plan at all. The more that things are firmed up in advance, the more likely that your wishes will be honored without a costly, divisive and time-consuming probate battle.
The good news
Fortunately, Americans who do have estate and legacy plans in place are committed to updating them and involving their families in the process. Almost all Americans who have discussed their estate/legacy goals with their financial advisers have updated their plan since creating it (98%). Additionally, 61% involved their family the last time they reviewed their estate/legacy plan with their financial adviser, increasing to 74% for Americans with children in the household.
This truly good news for those who have estate plans — and important food for thought for those who don’t.
Ken Cella is principal and head of the Client Strategies Group at Edward Jones.